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Investment Banking vs Hedge Fund

Updated on May 2, 2024
Article byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

Investment Banking vs Hedge Fund

Most people go for investment banking or hedge fund, thinking they will pay huge money. Yes, they do. But that can’t be the only reason you want to choose a career. Yes, they do. But that can’t be the only reason you want to choose a career. You need to see other aspects as well – how many hours of work you need to do daily, how your learning curve will trend, how you would be able to survive the long hours you would be investing in your career by putting everything on hold, how happy you would be in the long term. It would help if you asked these questions before jumping off college into one of these lucrative career opportunities.

In this article, we will see how these both can resonate with you and how you would be able to find a sweet spot between what you want and reality. On the surface, everything glitters, but that doesn’t mean everything is gold. No, we’re not discouraging you from taking any of the paths; all we want you to do is make an informed decision. Read this article, do your due diligence, and then decide what career suits you best. There’s nothing to be confused about these two career paths because they are completely different. The only commonality is that they are both career paths in finance.

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Investment Banking vs Hedge Fund – Outlook


See these two career paths in this perspective.

We assume you want to make good bucks and that your main goal is to choose these two career paths. So, we will talk about compensation in real terms.

Ready?

Investment banking is like saving money in the bank and earning simple interest. At the same time, the hedge fund is saving the same money and earning compound interest in the long run. So, if big money is your motto, you should look closely at this.

When an investment banking associate starts, he earns big bucks because his job is to raise capital! So, when he can bridge the gap between businesses and capital, he wins and earns big money.

But hedge fund is not that simple math. Hedge fund managers don’t get a lot of money just after joining. They get less in the beginning than investment bankers because success in hedge funds is all about meritocracy! If you want to be successful in hedge funds, you need to know that it’s all about investment performance. All you need to do is to create alpha in managing money. If you underperform, you will be out of business. If you outperform, you are in and will be able to earn great money in the long run.

So, what if you want to be a hedge fund manager? All you need to do is build yourself before joining as a hedge fund manager. Take financial modeling training, enroll in CFA program, and join academic & investment clubs. The more you can add value to the investment, the better your chances.

From the following fact, you will realize why we are saying this.

Let’s have a look at what happens after 10 years.

As an investment banker, if you invest 10 years into your career, you would be able to earn millions, even tens of millions.

And if you invest your career for 10 years in a hedge fund, you will earn in billions. You read it right! It is a billion dollars.

So, now you can understand why we told you that investment banking is about earning simple interest, whereas hedge fund is about earning compound interest.

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Investment Banking vs Hedge Fund – Education


Working in a top bank or with a hedge fund requires some work. So why will the top-notch investment bank/ hedge fund hire you? First, they will look at your background and capacities to achieve the desired results.

So, it would help if you had an education and a background that supports your career moves.

For being hired by a top-notch investment bank, your first motto would be to earn an MBA from an outstanding B-School. Make a list of the top 10 B-School in the world. Check constraints like budget, time, career prospects, faculties, and benefits. Choose the best. And then you are done. Half of your work is complete if you select a top-notch MBA school. Study hard, prepare, and keep investing your time, money, and effort in learning more about investment banking.

In the case of a hedge fund, it is a different story altogether. It’s more about investment performance. So you need to have a knack and a lot of investment knowledge. Then, enroll in the CFA program. CFA is the best program if you want to be a top-notch investment professional. Learn everything you can about financial modeling. Associate with people who are already doing the thing you dream of doing. For them, making time is hard. But still, you can invite them to lunch and ask the most important questions about the industry and the profession. And while doing all that, try to get an internship in a top-notch hedge fund. If you can get access to their internship program, you will be able to get real-life experience. Chances are they will appoint you full-time as the hedge fund manager.

Primary tasks or roles to play


Let’s see what an investment banking professional or a hedge fund manager does daily.

Let’s talk about investment banking first. Your chief daily tasks would be – Investment banking pitch books, modeling, and administrative work. Your main work revolves around pitch-book creating and modeling. Administrative work is less and often you can do it in your spare time. Now, what is pitch-book creation? A pitchbook means a buy-side client presentation. As investment banking professionals, you need to understand the market overview, and you also need to take care of graphical representation of possible exchange ratios. Besides creating a pitch book, it would help if you also handled multiple deals simultaneously. You will prepare models for mergers (or any other models) for multiple deals simultaneously and try to make them enticing for clients. Based on your representation, they would make the decisions. It would help if you also handled all the scenarios and would require you to perform sensitivity analyses. In short, you need to handle multiple clients simultaneously and expect the day to be hectic.

As a hedge fund manager, you need to handle the following things regularly –

  • New investments/ new memos: The primary focus of a hedge fund is to evaluate and research investment. We have already mentioned that as a hedge fund manager, you need to ensure that your ultimate goal is improving investment performance. After evaluating the investments, you will send your PM an email outlining the same (key pointers). Or, sometimes, if the investment needs to give more emphasis, you can create a whole memo detailing your findings and send them across.
  • Source & structure deals: Your main emphasis in a day would be to decide on the structure of the terms on less liquid assets or private/ semi-private deals. It would help if you also present potential deal scenarios to clients.
  • Investment updates: You would work on many holdings as a hedge fund manager. Thus, if any major change has occurred which can impact the investment in a major way, you need to provide updates. It may also require you to update the full thesis.
  • Marketing materials: You need to create marketing materials depending on the size of your fund so that you can pitch to your potential clients. You need to include benchmark, alpha/beta, sharp ratio, etc. and the whole strategy in the marketing materials to benefit your clients.

Investment Banking vs Hedge Fund – Culture & Lifestyle


If you talk about work-life balance, then investment banking professionals can’t have it. Because they need to work 12-16 hours a day, the chances are that they need to pull all night to finish important deals twice per week. How can you expect to have family time or to do anything else? But the investment banking profession pays very well from the beginning. Thus, professionals who have the drive to earn huge money can trade off other things for their careers.

In the case of hedge fund managers, they need to work hard, too. But working hours are not as hectic as of investment banking professionals. But, of course, that does not mean that hedge fund managers enjoy 4 hours per day of work. Nope. Their working hours revolve around 12 hours a day, and they rarely need to stay at night to work on important deals. Thus they get time to sleep well and take care of their health. And at the weekend they also get time for family.

If we do a comparative study, hedge fund managers have more work-life balance than investment banking professionals.

Investment Banking vs Hedge Fund Salary


As mentioned, an investment banker will start earning huge bucks from day one. But for hedge fund managers, it’s the merit that stands out. The better you are at improving the investment performance, the better your chances of making big money.

It is all about sticking to the career you choose. If you stick to investment banking, in the long run, you will earn millions. But the payoff in hedge funds is much more. Your earnings may reach a billion dollars. The idea is to do some soul-searching before you start so that you can pull through in tough times.

Investment Banking vs Hedge Fund –  Pros and Cons


Let’s examine some of the merits and demerits of investment banking and hedge funds.

Investment banking

Pros:

  • Investment banking is a lucrative profession where you would be the center of attraction. No matter where you go, you will create charisma around you. Think about it. Depending on your modeling, companies will sign big, whopping deals if you are an investment banking professional.
  • The investment banking profession has paid well from day one. If you can finish your MBA from a top-notch institute, you may be directly able to work with a top-notch bank.
  • Investment banking allows a professional to network in areas people usually can’t reach. You will be able to know CEOs, MDs, and CFOs and make great connections with them which will ultimately help you sign huge deals.

Cons:

  • The investment banking profession is not for the faint-hearted. You won’t get to see your family as much as you would see your colleagues in the office. You would have to work 12-16 hours daily, even at the weekend. Thus, maintaining a work-life balance is not for investment banking professionals.
  • Investment banking surely pays huge. But compared to what a hedge fund manager earns 10 years later, compensation for investment banking professionals is chicken feed.
  • It is called investment banking, but the main business is capital-raising. Thus, you would be wrong if you think it’s all about investment. You need to work your major time on pitch-book creation and business deals.

Hedge Fund

Pros:

  • The hedge fund manager is a tortoise in the story. He builds his career slowly. As a hedge fund career depends totally on meritocracy, there is ample chance of growth if you are ready to work on yourself.
  • Even if you work 12 hours a day, you can maintain a good work-life balance as you rarely need to pull through all night. You can get breaks at weekends also.
  • Your chances of earning huge money are up to you. Don’t get discouraged by the little pay in the beginning. Stick to it for years. Think long-term. Work hard on yourself. You can earn a billion dollars if you stay in this profession for ten years or more.

Cons:

  • The path to becoming a hedge fund manager is harder. It would help if you were the best of all to be able to earn huge money.
  • In the beginning, there is much less money. Because you cannot expect to outperform everyone in your team from day one, but as you learn and get better, your earnings will get multiplied.

Final Analysis

From the above discussion, you may have an idea about what your inclinations are. Follow your bliss. Money is just a by-product. So, make sure that whatever you choose, it should be something you can’t stop doing until the last breath of your life. And then think about money.

This article is a guide to Investment Banking vs Hedge Fund Manager. We discuss comparisons, concepts, prerequisites, employment, skills, etc. You may also have a look at the following articles: –